CenterPoint Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. CenterPoint is a utility holding company with electric transmission and distribution, natural gas distribution, interstate pipeline, gathering and processing, and competitive natural gas sales businesses.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.705 billion | $1.881 billion | $5.314 billion | $6.305 billion |
| Operating income | $88 million | $357 million | $728 million | $1.024 billion |
| Net income | $10 million | $973 million | $283 million | $1.240 billion |
| Diluted EPS | $0.02 | $2.27 | $0.66 | $2.89 |
| Operating cash flow | Not provided quarterly | $1.379 billion | $1.449 billion | |
| Cash and cash equivalents at period end | September 30: $722 million | December 31, 2011: $220 million |
- Operating income was sharply reduced by a $252 million non-cash goodwill impairment in Competitive Natural Gas Sales and Services. That segment reported an operating loss of $259 million in Q3 and $262 million for nine months; excluding impairment, losses were $7 million and $10 million, respectively.
- Other income items included a $136 million pre-tax gain from acquiring the remaining 50% of Waskom and a $136 million nine-month gain on marketable securities. Indexed-debt-security losses were $52 million in Q3 and $76 million for nine months.
- Effective tax rates were 92% for Q3 and 48% for nine months, compared with 35% and 36% in 2011. The non-deductible goodwill impairment was the principal driver; favorable tax adjustments related to an IRS settlement partly offset it.
- Operating cash flow declined $70 million year over year to $1.379 billion. Investing used $1.209 billion, including $360 million for acquisitions; financing provided $332 million. Cash increased $502 million from year-end.
- At September 30, total long-term debt was $8.415 billion, with $815 million current portion of other long-term debt, $451 million current transition and restoration bonds, and $136 million current indexed debt. Short-term borrowings were $53 million. Total assets were $22.477 billion and shareholders’ equity was $4.257 billion.
- Current assets were $2.752 billion versus current liabilities of $3.364 billion. Cash plus marketable securities totaled $1.244 billion. Revolving credit facilities totaled $2.45 billion; September utilization consisted of $11 million in letters of credit, with no commercial paper outstanding.
Changes and business drivers
- Revenue fell 9% in Q3 and 16% for nine months, while operating income fell $269 million and $296 million, respectively. Net income comparisons are strongly affected by 2011’s $587 million after-tax extraordinary gain and $352 million return on a true-up balance, neither of which recurred in 2012.
- Electric Transmission & Distribution operating income was $242 million in Q3 and $540 million for nine months, broadly stable versus 2011. Warmer, more normal weather reduced usage; customer growth, transmission-related revenues and equity return partly offset the impact.
- Natural Gas Distribution earned $5 million in Q3 versus a $2 million loss, but nine-month operating income declined to $135 million from $153 million, mainly due to warmer winter weather.
- Interstate Pipelines operating income decreased to $48 million in Q3 and $160 million for nine months, reflecting expired contracts and weaker seasonal, market-sensitive and ancillary transportation margins. Field Services earned $153 million for nine months, up from $136 million, supported by gathering growth and acquisitions, partly offset by lower commodity prices.
- CenterPoint acquired the remaining Waskom interest and other gathering assets for approximately $273 million in July. In May it acquired the Amoruso gathering system.
Outlook, risks and contingencies
- Management expected cash on hand and operating cash flows to cover anticipated cash needs for the remainder of 2012. Stated remaining-year requirements included approximately $478 million of capital expenditures and $62 million of scheduled transition and restoration bond principal payments, plus dividends and interest. No quantified earnings guidance is provided.
- In August 2012, CenterPoint Houston issued $800 million of general mortgage bonds at 2.25% and 3.55% to help fund redemption of $800 million of bonds due 2014 carrying 5.75% and 7.00% coupons. Redemption premiums were approximately $69 million and deferred as regulatory assets. January’s $1.695 billion transition-bond issuance is repaid through customer charges.
- MRT requested a higher FERC-approved cost of service; FERC suspended the proposed rates for five months and set issues for hearing, with a hearing contemplated in Q3 2013. CEGT began customer settlement discussions and may seek a general rate increase in 2013. Texas gas distribution and electric rate matters also remain in process.
- Risks include regulatory and rate-recovery outcomes, weather, commodity prices and low geographic/seasonal gas-price differentials, capital-market access and credit-rating changes, major project execution, counterparty performance, and litigation and environmental matters. Management reported no material changes to the risk factors in its 2011 Form 10-K.
- Potential collateral exposure includes up to $175 million if CERC’s credit ratings fall below relevant pipeline thresholds; the filing also describes counterparty and derivative collateral triggers. GenOn’s indemnity and guarantee obligations, including collateral supporting certain gas-transportation guarantees, depend on its ability to perform.
- Management said it did not expect the disclosed legal and environmental proceedings to materially affect financial condition, results or cash flows. Minnesota manufactured-gas-plant remediation accruals were $13 million, with estimated possible costs of $6 million to $41 million.
Investor verification priorities
- Assess recurring earnings separately from 2011 true-up-related gains and 2012’s impairment, Waskom remeasurement gain, and marketable- and indexed-security valuation changes.
- Review assumptions behind the $252 million goodwill impairment and whether weak gas-price differentials continue to affect the competitive gas business.
- Track rate-case decisions, especially MRT’s FERC filing, CEGT’s settlement process, and CenterPoint Houston’s pending rate-case appeal.
- Confirm debt maturities, refinancing costs, covenant compliance, liquidity, and potential collateral requirements or guarantees.
- Monitor whether operating cash flow supports planned infrastructure spending, debt service and dividends, and whether Waskom and other gathering investments deliver expected results.